AGENDA ITEM 9 BOROUGH OF POOLE

CABINET

2nd October 2007

MEDIUM TERM FINANCIAL PLAN 2008/09 TO 2010/11

PART OF THE PUBLISHED FORWARD PLAN - Yes

STATUS – STRATEGIC POLICY

1. Purpose & Policy Context of Report

1.1 This report updates the Medium Term Financial Plan (MTFP) and extends it a further year to enable Cabinet and the Scrutiny Committees to consider the issues raised prior to making a recommendation for its adoption to Council in December 2007.

1.2 The updated MTFP will form the basis of the Leader’s annual budget consultation process during the Autumn of 2007.

2. Recommendations

2.1Cabinet is requested to approve the updated Medium Term Financial Plan (MTFP) for 2008/09 to 2010/11 on the following bases:

i) Management Team develop a series of options with Cabinet Members that will enable the issues raised in this report to be addressed.

ii) Any growth in respect of the refreshed Corporate Strategy ‘Striving for Excellence’ to be met by redirecting existing resources. (para 4.2)

iii) No further reserves other than the £1m already approved for 2008/09 and 2009/10 be used to support the revenue budget over the period of the plan. ( para 5.1)

iv) The Council’s general operational unearmarked reserves to be set at a minimum level of £5m over the period of the plan. (para 5.10)

v) The need for Service Units to meet their savings and efficiency targets over the period of the MTFP continues. (para 5.4)

vi) The Business Transformation Programme plays a central role in protecting services by developing a comprehensive strategy to deliver savings and improvement. Central to this will be the Asset Management Strategy. (para 5.6) vii) Cabinet note the issue relating to passporting the full Dedicated Schools Grant increase onto Individual Schools Budgets. (para 6.18)

viii) Expenditure in 2007/08 to be contained within original budget estimates. (para 8.1)

3. Background

3.1 The Council’s Medium Term Financial Plan (MTFP) covers the current year and three years hence and is reviewed annually.

3.2 The MTFP is a key part of the Council’s Policy and Service Planning cycle and underpins the refreshed Corporate Strategy ‘Striving for Excellence… for the People of Poole’. The MTFP aims to ensure that all resources are directed towards policy priorities. The plan sets out the financial direction of the Council and outlines the financial pressures likely to be faced over the next three years. The detailed planning for the annual budget cycle is subsequently based on this.

3.3This planning will be further refined in December 2007 following a period of consultation on the Council’s plans by the Leader of the Council and scrutiny by members (timetable attached at Appendix A). At this point the latest information on the Council’s financial position will be considered along with any service pressures identified and a budget strategy will be agreed and specific proposals then developed for review in January, when the Council receives final notification of its level of central government funding.

3.4 In developing detail budget plans the Council should:

o Scrutinise the allocation of resources and ensure it is targeted at priorities and areas where unavoidable growth is occurring. o Acknowledge future year commitments. o Demonstrate value for money in service delivery. o Recognise the impact that increases in council tax levels have on council taxpayers. o Ensure that fees and charges are set at an appropriate level, taking into account comparative levels of charges and ability to pay. o Ensure that any cost of prudential borrowing is met from efficiency gains generated.

3.5 Medium term financial planning continues to be difficult. The Council, in common with most local authorities, continues to be at risk from significant financial pressures in areas the Council has little choice on, including equal pay, an ageing population, waste disposal and concessionary fares. Furthermore, uncertainties surrounding the level of government financial support and restrictions on the amount that can be raised from Council Tax make financial planning a challenging task. 3.6 Updating the MTFP

In updating the MTFP the following issues have been considered and are covered in more detail later in the report:

i) The impact of the refreshed Corporate Strategy ii) The existing overall financial strategy, including reserves. iii) Internal and external pressures which will influence the Council’s financial position. iv) The impact of Major Projects v) The Council’s current financial position and outlook.

4. The Impact of the Refreshed Corporate Strategy

4.1The refreshed Striving for Excellence builds on previous Corporate Strategies and is a continuation of the Council’s ambitions for Poole. Whilst the Corporate Objectives broadly mirror the previous Priorities, new priorities have been identified which will have an impact on future financial planning. These are:

o Improving Housing for Local People o Reducing Poole’s Carbon Footprint o Meeting the Needs of our Ageing Population o Improving Efficiency & Effectiveness

4.2Work is being undertaken to determine the financial impact of initiatives planned to deliver these priorities and it is assumed these will be contained within existing resources.

5. Overall Financial Strategy

Revenue

5.1In each year of the MTFP estimated expenditure exceeds anticipated funding by between £2m - £4M. The Council has for the past 2 years planned to support the MTFP with the use of reserves. The Council has recognised that this is not a sustainable strategy and that over the medium term the Council needs to bring its revenue budget more into line with levels of anticipated annual funding. With this in mind no further support from reserves is anticipated at this stage from 2010/11 onwards.

5.2 The final year of the Government’s three year efficiency gains strategy is 2007/08. The Council looks set to meet its target of £6.6m.

5.3 The Government’s intention for future savings strategies is unclear but is expected to be revealed in the Comprehensive Spending Review due in October 2007. The expectation is that the targets may be actual cashable savings and possibly deducted from the formula grant. 5.4In addition to responding to Government targets the Council will need to find savings from within its budget to accommodate the pressures outlined above. Service Units have been given savings targets for 2008/09 and are currently working to meet these. Future savings targets will be even greater and more challenging as increased income from Government Formula Grant and Council Tax will only meet a proportion of the growth in costs.

5.5 The need to find savings and efficiencies has been a major component to meeting the funding requirement and whilst the use of reserves has reduced this gap the need for savings and efficiencies will be key to achieving a balanced plan. The need to continue this approach throughout the life of the plan will still be required and is likely to become more challenging each year. The current strategy is for each Service Unit to find the necessary savings from existing resources on a pro rata basis.

5.6 To support the need for savings and efficiencies the Council is developing a Business Transformation Programme which has received pump priming funding and will be fundamental to co-ordinating a long term, comprehensive strategy to ensure operational efficiency and the meeting of the current gap of expenditure over income currently identified. This is in recognition of the fact that the continued erosion of service budgets cannot continue to meet the funding gap. The objective of the programme is to protect services through fundamental organisational change.

5.7 The Council’s capital expenditure and investment strategy also impacts upon the revenue budget. Currently, a £1.2m contribution from the revenue budget is used to support the capital programme, £700,000 for general purposes and £500,000 for ICT Investment. This strategy needs to be confirmed during the development of the revised MTFP to enable the development of the capital strategy, together with:

 Asset disposal Strategy ( generation of capital receipts)

 The level of ‘supported’ borrowing that the Council takes up. (Currently all borrowing notified by the Government is used).

 Review of capital programme ‘commitments’.

Reserves

5.8As at 1st April 2007, the Council’s unearmarked general fund revenue reserves totalled £7.0m and were summarised as follows: £m Total Revenue Reserves 17.0

Earmarked Reserves 5.8 Schools 4.2

Unearmarked Reserves 7.0 2006/07 target 4.5 5.9The level of General Reserves, excluding school balances is £7m and of this £1.595 is being used to support the current MTFP in 2007/08 to 2009/10. The reserves are held to provide a level of contingency and meet unforeseen expenditure.

5.10 The Council is now committed to a number of major projects which carry significant financial risk (Equal Pay review, Material Recycling Facility, Twin Sails, Fourways and Schools for the Future). Whilst resources have been identified within the MTFP for the projects there is still a need to ensure that there are adequate contingencies should unforeseen problems occur. Maintaining an appropriate level of reserves is therefore necessary. A planned increase to at least £5m is recommended for general fund unearmarked reserves ( previously £3m).

Capital Resources

5.11 The current MTFP capital programme totals approximately £81.3m, and is set out in more detail in Appendix B. This includes a number of assumptions covering the period to 2011 based in the main on previous years allocations, including maintaining the revenue contribution to capital at £1.2m. However, a decision as to how this is to be allocated will need to be considered. The programme does not include any plans for dealing with the planned Material Recycling Facility or any new capital investment priorities.

Portfolio Programme £M Children’s Services 45.2 Environmental Areas 3.5 Community Support 2.7 Housing Areas 4.7 Local Economy (Inc. Transportation) 18.0 Resources 6.2 Contingency 1.0 81.3

5.12 The funding of the programme is derived from a variety of sources. Almost 78% is funded directly by the Government in the form of grant or indirectly in the form of supported borrowing. This funding is targeted at the local delivery of national priorities, particularly education services and transportation. Without support from the revenue budget and generation of capital receipts local investment and choice will become more restricted. 5.13 A summary of funding sources is set out as follows:

Funding source Value £M Supported Borrowing 17.7 Education Grants 34.0 Other Grants 7.1 Total Government Funding 58.8 3rd Party Contributions 4.9 Council Corporate Contribution 17.6 Total Funding 81.3 Currently Uncommitted 2.2

5.14 The Council’s corporate contribution to the capital programme is made in the form of an annual revenue contribution of £1.2m and capital receipts generated from the disposal of assets. Including this amount, currently, £2.2m of corporate contribution is uncommitted.

5.15 In addition, to these sources of funding the Council has as at April 2007 £8m of developers contribution available to support its programmes for meeting local service needs. Some of this is being committed to projects during 2007/08.

6. External and Internal Pressures

Formula Grant System

6.1 The outcome of the Government’s Comprehensive Spending Review will be announced in October 2007 and will give an indication of the funding available for the public sector as a whole. The expectation at this stage is that increases will be limited to less than 2% and that a real cashable savings target will be established which could in fact negate any increase. Within the MTFP a forecast of 1% increase has been included which equates to £232,000, however, this may be optimistic . The local government financial settlement will be announced in November/December and be for three years 2008/09 - 2010/11.

6.2 The Government have not indicated that they intend to relax their threat of capping based on an expectation for council tax rises to be below 5%.

6.3 The original MTFP was based on a council tax rise of 4% in 2008/09 and 2009/10, however, a 5% assumption has now been applied in the light of the pressures outlined in the following sections.

Economic Trends

6.4The economic outlook for the UK remains uncertain, the direction of the housing market, the volatility of the financial markets and the potential slow down in Government spending growth could all have an impact on the economy. General inflation has fluctuated throughout the year with this trend expected to continue. Energy prices continue to be subject to significant volatility. Interest rates are not considered to have peaked yet. The MTFP contains a 2% provision for price increases which is close to the current Consumer Price Index but less than the Retail Price Index of 3.8% which many contract increases are based on.

6.5 As a result of the volatility that is affecting the financial markets at the time of writing this report a prudent assumption regarding the forecast for income earned from investments has been made. As the year progresses it is hoped the position will stabilise with the forecast being changed if necessary.

6.6 Public Sector pay increases are generally influenced by the Government’s wage restraint, as seen during this year. The MTFP has assumed a 2.5% increase which is above the Treasury limit of 2%.

Waste Disposal/Landfill Tax

6.7 In order to ‘encourage’ Councils to be proactive in minimising waste disposal the Government has increased the cost of landfill tax by £8 per tonne in 2008, 2009 and 2010 this will have an annual impact of over £400,000. In 2008/09 additional funding to accommodate this and waste arisings is estimated at 530,000.

6.8 In 2002, Council approved the waste strategy which contained the long term plan of how the increasing production of waste in Poole would be best managed in order to minimise costs, particularly landfill tax. The strategy included the transport of some of Poole’s waste to an out of borough site to be incinerated. As a consequence costs will rise significantly in 2009/10, estimated at £500,000. Whilst the cost of implementing this strategy has increased the resource requirement over the life of the MTFP, this increase is over 50% less than if the Council had done nothing and continued to send the same volumes of waste to landfill.

6.9 As mentioned earlier in the report the Council is considering the building of a material recycling facility (MRF) along with a waste transfer station. A business case is currently being compiled and will determine whether the project proceeds. The estimated cost of which is in the region of £14m. It is anticipated that the funding of the MRF (£8m) will be in the form of prudential borrowing the cost of which will be met from a share of gate fees generated from the site. The funding of the transfer station and other project management costs of £6m is yet to be identified. Furthermore, additional revenue costs of £300,000 per annum associated with the need to relocate existing Hatchpond occupants in 2009/10 has been forecast but has not been included in the MTFP.

Adult Social Services

6.10 In addition to a basic pay and price increase, an additional £1.9m has been included within the MTFP for 2008/09 (£2.1m in 2009/10 and £2.6m in 2010/11) for adult social services. Of this, £485,000 relates to under 65s particularly those with learning disabilities. The remaining £1.4m relates to over 65s and can be analysed as follows;

Adult Social Services over 65’s increased cost analysis Demograhic growth 2% £0.22m Increase in Higher Dependency £0.62m Above inflation costs £0.31m Top ups £0.24m Total additional resource requirement £1.39m

6.11 The Council and health service partners must by 2010 implement plans for providing appropriate accommodation and personal plans for people with a learning disability who are currently living as long term NHS patients. The Council will become statutorily responsible for providing care for up to 20 people. As detailed plans are developed and agreement reached with the health service on future funding responsibilities the issues for the MTFP will be clarified.

Concessionary Fares

6.12 The popularity of the scheme and the increasing costs charged by the bus operator continue to create a pressure within the MTFP. Projections are still best estimates for the current scheme and with the national scheme being implemented from 2008 this pressure is set to grow. A forecast increase in resource of £497,000 has been identified for the current scheme in 2008/09 but this does not include the impact of the new national scheme where the Government have made no specific announcement on how this will be funded, except for set up costs announced in 2007/08. Also not included is any potential claim from bus operators for increased levels of reimbursement.

Equal Pay

6.13 The full financial impact of the Equal Pay review is unknown at this stage. An increase in base budget of £1.4m was approved for 2007/08, however, until the process is complete and an agreement is reached with staff and trade unions the actual cost will not be known. Furthermore, there is a risk that back pay will be payable in some cases, again the potential cost of this is not known. No provision has been made for this at this stage.

Childcare

6.14 Costs of Looked after Children, particularly those in residential care are anticipated to continue to increase above the cost of inflation, an amount of £270,000 over and above the 2% allowed for price increases has been included within the plan. Additional costs as a result of a national fostering allowance scheme being implemented are also forecast. Fees and Charges

6.15 To ensure that the Council maintains essential services, existing charges or any new potential charges for discretionary services need to be reviewed by each service and should form part of the overall budget setting process an annual increase of 2% has been included within the MTFP.

Prudential Borrowing

6.16 From April 2004 the Council has been allowed to borrow money for capital spending on the basis that it is affordable. The MTFP needs to consider the impact of any prudential borrowing in the future on the Council’s budget and link this to the need to generate cashable efficiency gains to at least meet any additional cost of borrowing.

Efficiency & Savings

6.17 Efficiencies and savings already recognised include costs associated with some energy contracts reducing, creating a potential saving of £204,000.

Schools – Dedicated Schools Grant

6.18 An assumed increase of approximately 4% is forecast regarding the dedicated schools grant in each year between 2008/09 and 2010/11. The Government expect that this level of increase is passed onto schools within the overall Individual School Budget. However, additional costs forecast in 2008/09 in relation to Special Educational Needs (£400,000) and more significantly independent school places (£900,000) have meant that the increase the Council can pass on to schools for their Individual School Budgets in 2008/09 may only be 2.7%. If the Council wish only to pass on this amount, this will need to be done in consultation with the Schools Forum and possibly the Government.

6.19 In order to achieve a 4% increase to Individual School Budgets the Council would need to consider the following options to ‘top up’ Individual School Budgets by £800,000;

 review the current allocation of the Dedicated Schools Grant. However, there is limited opportunity for this.  Use school balances. However, this would only be a short term solution.  Review the allocation of non DSG education funding

6.20 Whilst capital investment is planned to be directed at this issue it will continue to be problematic until the Council has in place improved arrangements to deal with pupils who have special needs. Furthermore, it restricts the opportunity to create headroom for the revenue impact of the Schools for the Future project in terms of PFI costs, staff redeployment and increased floor area costs. This coupled with the Government’s intention to review the DSG formula from 2011 could mean that the long term revenue funding of schools will come under pressure and require the Council to consider it more closely within the MTFP rather than seeing it as a ringfenced fully funded service.

HRA

6.21 During 2007 Cabinet received a revised and update HRA business plan from Poole Housing Partnership (PHP). This indicated that;

 the decent homes standard can be achieved by 2010/11 by utilising the resources made available by Government from the establishment of an arm’s length management company (ALMO) along with a re-prioritisation of current resources.

 based on the need for continual investment in the Council’s housing stock post 2010/11, there would be a significant shortfall in available resources.

6.22 In order to examine the future options for the HRA and to take fully into account the views of tenants and leaseholders Cabinet have proposed the establishment of a “select style” committee.

6.23 Cabinet have also previously agreed that the timetable for the production of the PHP delivery plan needs to be reviewed to ensure the budget is based on an agreed management fee which in turn is under pinned by an approved delivery plan. Negotiations with PHP on this matter continue to establish if a December cabinet date for the delivery plan is an achievable deadline.

Local Government Pension Fund

6.24 The results of the triennial valuation of the Dorset Pension Fund have recently been released and indicate that the funding position has improved. The Head of Financial Services will be meeting with the actuary in early October 2007 to establish what action, if any, may be required with regard to Poole’s element.

7. Major Projects

Schools for the Future

7.1 Council approved the Schools for the Future project in early 2007. The first phase, which is supported by a Government Grant, is underway. The Council are working in partnership with Bournemouth Borough Council on the second phase which forms part of the Government’s Building Schools for the Future programme. The Council has allocated £1.5m from General Fund resources to support the project management of the scheme and it is anticipated that all costs will be contained either within the Education Capital Programme or the Dedicated Schools Grant. Therefore, no further provision has been earmarked for this project within the MTFP. Full Sail Ahead

7.2 Progress is continuing on the JJ Gallagher planning application. No additional resources are planned for this project.

Customer First

7.3 Cabinet approved a report on the implementation of Stage 1 of Customers First at its meeting in September. This included a review of what has been achieved in the context of the business case approved in 2005 and proposals for the approach to Stage 2. Resources of £289,000 originally made available to support the stage 1 implementation will now be utilised to deliver a preliminary business case for stage 2. A sum of £500,000 was included in 2007/08 as a commitment to progress this project, subject to the outcome of the business case.

Fourways

7.4 In July 2007 Council approved the allocation of £2m toward progressing the Fourways project which has now been incorporated within the Capital Programme. No further funding is proposed at this stage.

Affordable Housing

7.5Delivery of Affordable Housing is a key priority of the Council and is supported via the Council’s own financial resources of approximately £1m per annum, contributions through Section 106 contributions and through disposals of Council owned land. This programme would be affected if members chose to reduce the revenue contribution to Capital. A major outcome of the Full Sail Ahead project is to contribute a significant level of affordable housing.

Town Centre North

7.6Over the last two years the Council has worked with partners to develop options for extending and improving the town's retail offer. At present approximately £240,000 is allocated for taking these options forward. The adequacy of this sum will need to be confirmed once a new work programme is established.

8. The Council’s Current Financial Position and Outlook

Current Financial Position

8.1The Council’s current 2007/08 financial position remains positive with the forecast that the revenue budget outturn will be in surplus. The key reasons for this are an additional amount of LABGI grant has been received and income earned from investments has increased. Both of these items are ‘one off’ benefits and therefore the advice is that the underlying budget position should be seen as being on target rather than indicating an underspending. 8.2In capital terms, slippage and re-profiling continue to occur and result in distorting in year performance.

Outlook for the Future

8.3Appendix C provides an indicative three year financial analysis of the issues raised during this review. These are purely for illustrative purposes at this stage, given the uncertainty around the costs of some financial pressures and the recognition that further work will need to be carried out to refine the figures before the budget is finalised in February 2007. Cabinet will receive further reports on individual issues as appropriate.

8.4 To allow forward planning, an attempt has been made to forecast the likely increase in the base budget using 2007/08 as a starting point.

8.5 To respond to both the increased spending pressures identified in this report and the need to direct resources towards achieving the actions set out in the Council’s Improvement Plan.

8.6 This MTFP review emphasises the need to deliver the core element of the funding gap plan which is to deliver budget reductions in excess of £3m in 2009/10 and 2010/11.

9 Conclusion

9.1During the next period of the MTFP the Council will be in the delivery phase of the ambitious programme of projects it has committed to. With these projects comes significant financial risk and this coupled with the revenue pressures in a number of service areas will make the next three years possibly the most challenging, financially, the Council has faced. The fact that little reliance can be placed on external funding either from the Government or the Council Tax payer softening the impact means that delivering a balanced budget and managing the risks posed by projects will be wholly from within the existing resource base. This will require difficult choices if the Council is to deliver its plans and address the pressures of unavoidable growth in some service costs.

9.2 In the light of this, Management Team will work with Cabinet in developing a series of options during the budget consultation process in order to address the issues raised in this report.

R.L Jackson Head of Financial Services

01202 633131 24 September 2007